From my time as a Construction Manager rehabbing REO foreclosure properties to my career in residential design I have learned a lot of valuable lessons and developed some helpful strategies that I believe can be useful to real estate investors.
During what was probably the height of the foreclosure boom I worked for a national company that banks, brokers and investors hired to maintain and in many cases rehab their properties. While the company’s business model had several flaws and the industry itself was prone to shoddy work from shady contractors, I was able to develop a management strategy that worked well on the major renovation projects and produced positive outcomes for both the investors and the contractors working for me.
Here are some of the key insights I have learned and strategies I have used…
- You get what you pay for. The easiest trap to fall into is always hiring the guy with the lowest bid. Of my Top 4 contractors I hired on a regular basis, three were never the lowest bid and the fourth was only about half the time. But guess what? I never had any issues with their work, and on the couple of rare occasions there was a callback, they were quick to correct whatever it was. Their work was always superior. Contrast that to my 4 worst contractors we used. They were always the lowest bid, or willing to match it just to get the job. I can’t recall a single project that we didn’t have issues on. Yet our clients (and often management) insisted on using them over and over because they were cheapest, despite repeated poor work and missed deadlines. As an investor you want to maximize profit, so consider that the guy who will do the best work will often cost more and the guy who costs less often does the worst work. High-cost doesn’t always mean high quality, but low-cost very often means low quality.
- Piece out each project and hire trade-specific contractors. There are a lot of glorified handyman-types out there who may be skilled in one or two areas but you have hired to complete your entire project. That could be a costly mistake. Develop a solid and diverse network of contractors and suppliers and learn to project manage your renovations, or hire somebody who can do that for you rather than hiring one “General” Contractor. This can also help keep your cost down as you are contracting with several individuals or companies directly, rather than having a GC do that for you and add another percentage on top for doing so. Another side benefit is you are making sure everyone involved is getting paid in full and on time, and not risking having a GC who is having trouble making ends meet and delays paying everyone. I have seen a lot of instances where this leads to headaches, angry subcontractors and property liens.
- Purchase the finish materials directly whenever possible. This one can cut both ways, as sometimes a contractor will have discounted buying power because of the volume they typically bring. However that is not always the case, and in fact you can establish a lot of these relationships and advantages yourself. What I would often do on larger projects is purchase the finish materials myself. This would be things like paint, flooring, cabinets, fixtures, etc. For one thing I would get what I wanted and not what the contractor chose (see next point below). Also, that equated to less overhead the contractors were carrying and left them with only time/labor cost. This was a win-win for both of us as it meant I could get a little better pricing overall and they had less out-of-pocket expense. It doesn’t always work on every project, but more often than not it did for me and is my preferred method. I have a good friend who is a construction manager for large multi-family apartment complexes and this is what they do for virtually everything on all of their projects.
- Define the entire scope of work. Vague and undefined line items can result in an undesired outcome where you imagined one thing and your contractor another. They technically completed the work and fulfilled their end of the contract, but you are left with something less than what you desired. Then you are spending more money if you choose to re-do it, not to mention the added time it will take which delays your getting the home on the market. It is important to define exactly what you want done and what you expect it to look like when finished. More on this in the last point below.
- Maintain good relationships with your contractors. Good contractors who do quality work are invaluable. I have dealt with hundreds of contractors over the years, and I can count on just my two hands how many actually do good work and I would hire again. For different reasons it is hard to find good contractors. And when you find them you need to do whatever you can to maintain good relationships with them. Looking at them as partners in your real estate investing journey can be a big key in being successful.
- Hiring a designer will cost you money, but it will make you even more. If you are doing a large renovation project in the tens of thousands of dollars, hiring a designer is one of the best choices you can make. This is often overlooked or disregarded as unnecessary. But aside from the aesthetic benefits a designer can bring, there is another that is just as valuable if not more so. Let me explain. I use a process called Building Information Modeling (BIM), which is widely used in the commercial sector but rare in residential. Of the many benefits of BIM, real estate investors can most benefit from it by allowing all parties involved to see the intended/desired outcome before contracts are signed, the first wall is torn down and the first material is purchased. We all know exactly what we’re working towards. BIM also allows us to produce a complete list of materials from the beginning, including specific items and accurate quantities. This process can save time by having fewer change orders or delays, having more accurate estimates and reducing the amount of wasted material, which means wasted cost. While a designer may seem like an unnecessary expense, you will likely spend less on a designer than you will on your kitchen cabinets and can not only help reduce your total construction cost but also fetch you a higher sale price and larger return on your investments.
I hope this was useful for some of you in your real estate investment journey. If you have any questions or could use some specific input, you are welcome to PM me.
Great info Joshua thanks for sharing!
I would have to agree! good read
Dallas Kidd, Contractor in MO (#Mo124556) and KS (#g566t4456)
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